Exchange Rate Management and Crisis Susceptibility: A Reassessment

By Atish R. Ghosh, Jonathan David Ostry, Mahvash S Qureshi

January 24, 2014

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Atish R. Ghosh, Jonathan David Ostry, and Mahvash S Qureshi. Exchange Rate Management and Crisis Susceptibility: A Reassessment, (USA: International Monetary Fund, 2014) accessed December 21, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

This paper revisits the bipolar prescription for exchange rate regime choice and asks two questions: are the poles of hard pegs and pure floats still safer than the middle? And where to draw the line between safe floats and risky intermediate regimes? Our findings, based on a sample of 50 EMEs over 1980-2011, show that macroeconomic and financial vulnerabilities are significantly greater under less flexible intermediate regimes—including hard pegs—as compared to floats. While not especially susceptible to banking or currency crises, hard pegs are significantly more prone to growth collapses, suggesting that the security of the hard end of the prescription is largely illusory. Intermediate regimes as a class are the most susceptible to crises, but “managed floats”—a subclass within such regimes—behave much more like pure floats, with significantly lower risks and fewer crises. “Managed floating,” however, is a nebulous concept; a characterization of more crisis prone regimes suggests no simple dividing line between safe floats and risky intermediate regimes.

Subject: Conventional peg, Currencies, Currency crises, Exchange rate arrangements, Exchange rate flexibility, Financial crises, Foreign exchange, Money

Keywords: Banking crisis, Banking crisis propensity, Conventional peg, Crisis, Crisis propensity, Currencies, Currency crises, Currency crisis, Current account, EME crisis, Emerging markets, Europe, Exchange rate arrangements, Exchange rate flexibility, Exchange rate overvaluation, Exchange rate regimes, Global, Growth crisis, Intermediate exchange rate regime, Regime choice, Regime classification, Solid windowtext 1pt, Vulnerabilities, WP

Publication Details

Pages:

46
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2014/011
Stock No:

WPIEA2014011
ISBN:

9781484383971
ISSN:

1018-5941

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